Inaction by OPEC+ would likely trigger potentially severe bout of selling

Oil&Gas Materials 2 March 2020 13:28 (UTC +04:00)
Inaction by OPEC+ would likely trigger potentially severe bout of selling

BAKU, Azerbaijan, March 2

By Leman Zeynalova - Trend:

OPEC+ is expected to agree to additional cuts, in order to stem the rout in oil prices, Trend reports citing Fitch Solutions Country Risk and Industry Research (a unit of Fitch Group).

The company said in its report that Brent has lost almost 25 percent of its value in the year-to-date, falling almost 15 percent in the last week alone.

“Against this backdrop, inaction by OPEC+ would likely trigger another (potentially severe) bout of selling. Ultimately, it is the spread of the virus and its impact on economic activity and market sentiment that will set the tone for Brent next month. That said, an additional cut by the group would help to put a floor under prices and - depending on the scale of the cut - could provide the basis for a partial recovery,” said Fitch Solutions.

The report says that the main stumbling block will be Russia.

“Saudi Arabia could act unilaterally, or with the aid of its allies in the Gulf Cooperation Council (GCC). However, this could undermine confidence in the group, if it were interpreted as a sign that the deal was breaking down. Russia's 2020 federal budget uses an annual average forecast of $57 per barrel for Urals, which is currently trading at around $48 per barrel. This implies that the country will face some significant fiscal pressures, if prices stay at their current levels. This will give Moscow greater incentive to act and we believe this incentive will prove sufficient.”

Any cut will likely be of a short duration – e.g. three months - with the barrels brought immediately back to market thereafter, Fitch Solutions believes.

“We believe that output will remain heavily constrained over the coming years, as Saudi looks to gradually reintroduce cut barrels to market, without triggering a relapse in prices. As of Q120, we estimate that more than 5 million barrels per day is being held out of the market by OPEC and Russia, due to a combination of the OPEC+ cut agreement, US sanctions in place on Venezuela and Iran and renewed conflict in Libya.”

Not all of these volumes could be recovered, even were the agreement ended, sanctions lifted and the conflict ended, according to the report.

“Some declines - notably those in Venezuela and West Africa - reflect structural factors, such as a maturing asset base, underinvestment and poor resource management. However, we estimate that comfortably in excess of 4 million barrels per day could be returned to market within a six month timeframe, were the above constraints removed.”


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